Lessons from the February 2012 European gas “crisis”

In February 2012, during a period of extremely cold weather across Russia and large parts of Europe, Gazprom failed to supply all the gas that was requested from it by its non-CIS customers in countries ranging from Poland in the north to Italy and Greece in the south of Europe. This situation led to concerns over a gas shortage and caused gas prices to spike at all the major hubs on the continent and in the UK. This Comment argues that the supposed supply “crisis” was not caused by any production shortfall in Russia but by a combination of inadequate storage available to Gazprom, excess gas withdrawal by Ukraine and in particular by political considerations in Russia ahead of the Presidential election in early March. However, it does highlight the current constraints to the Russian gas supply machine under certain severe temperature conditions. The paper also argues that, in contradiction to the claims of Alexander Medvedev (the Head of GazpromExport) that “spot markets failed to compensate for the increased demand”, in fact the markets had a logical price reaction to daily supply/demand changes. Although this reaction resulted in sharply higher prices in the short term, this provided a potent commercial signal which in turn led to spot supplies and/or demand management and then, as the situation resolved itself, produced lower prices so that the monthly average was still below the oil-indexed average price. While it is certainly true that the mature hubs at NBP and TTF reacted in a more responsive manner than some of the Continent’s less liquid hubs, it was nevertheless the case that, overall, customers were supplied at a market price and traders were able to arbitrage a short-term supply and demand imbalance.